The Science of the ReFi
In the United States, homeowners have been refinancing at a rate not seen in years.
Record low interest rates and the home equity available have created a perfect situation for homeowners to consider refinancing.
If you own your home and have been thinking about refinancing, now is the time to learn about the refinancing process and how it works.
Traditionally, homeowners refinance when they want to get a lower interest rate on their mortgage. This allows them to save money each month on their mortgage payment.
However, there are other reasons that some homeowners may consider refinancing-such as taking cash out of their home equity, consolidating debt, or shortening the length of their mortgage.
Let's break down the science of the refinance process and how it works.
What are the benefits of refinancing?
There are many benefits to refinancing, including the fact that you can save money each month on your mortgage payment if you get a lower interest rate. You may also be interested in refinancing if you want to take cash out of equity or consolidate debts.
Some homeowners choose to refinance for debt consolidation, which means they refinance the current mortgage into a new, larger one. This allows them to have just one monthly payment to simplify their lives.
With refinance cash-out refinancing, you are using the equity in your home to take out cash for another purpose, such as remodeling or consolidating debt. These are other reasons why some people may be interested in refinancing.
What are the different types of refinancing?
There are three main types of refinances: rate-and-term, cash-out, and debt consolidation.
If you have an adjustable-rate mortgage (ARM), or if rates have dropped substantially since your original purchase, you may want to consider doing a rate-and-term refinance.
Also, if you want to consolidate debts, such as car loans or credit cards, by refinancing your mortgage to pay off those other debts, this is called a debt consolidation refinance.
When homeowners do a cash-out refi, they are using the equity in their home to take out cash for another purpose, such as remodeling or consolidating debt.
What are the steps for refinancing?
Understanding the refinancing process can help you decide if it's right for you. Let's walk step by step through the refinancing process.
Step 1: Know Your Goals
So what is the purpose of your refinance? What do you want to accomplish with it? Are you trying to get a lower interest rate, or are there other, larger goals in mind?
If your goal is to save money each month on your mortgage payment and get a lower interest rate, this is called a "rate-and-term refi." Or if you want to consolidate your debt and take cash out of equity, this is called a "cash-out refi."
If it's debt consolidation that you're after, refinancing is not the only option. You can try negotiating with creditors to lower interest rates and pay off debts sooner (this would be like doing a "debt settlement").
You can make one easy monthly payment by consolidating debts instead of worrying about multiple bills.
Step 2: Shop Around and Get Pre-Approved for a Loan
Before settling on particular lenders or refinancing packages, it's best to shop around and compare interest rates and offers from several banks and lending institutions. This way you'll be able to find the lowest interest rates.
When you're shopping around for a loan, it's important that you have an idea of your credit score. That way, you'll know the amount of money the bank is willing to lend you and be able to compare that to other offers.
If your credit score is lower than expected, there are ways to rebuild your credit with what's called a "secured loan." You'll have to put down collateral, such as a car or some other valuable asset, but you might find it worthwhile in the long run.
You can also try getting pre-approved for a loan by going through an online broker. Just remember that most brokers work on commission, so they might not show you the best offers from other lenders.
Also, keep in mind that the broker isn't working for you as a consumer-you are buying into their business and paying fees to them.
Step 3: Apply for Your Loan
Once you've identified a few options and gotten pre-qualified, it's time to apply for your loan. During this process, the lender will pull your credit score and ask you to provide some documentation, such as proof of income, assets, debts, etc.
Step 4: Loan Agreement and Closing Process
After an offer has been accepted on your new loan or refinanced mortgage, you will be asked to sign a binding agreement that states the terms and conditions of your loan.
The closing date will be set when you will sign the final documents and get money from your new loan.
In order to protect both parties, there are certain disclosures for refinances that lenders must provide to homeowners before they take out a new mortgage. These disclosures include the Annual Percentage Rate (APR), fees, and details about the loan's terms.
You may also be required to sign a new mortgage note that outlines all of your benefits and loans rights.
A new title search will be done on your home, which costs around $300-$400 depending on where you live. The lender will also send an inspector out to your home to make sure that it is still worth what you are borrowing.
Step 5: Begin Your New Loan
Once all of the paperwork has been signed, your new lender will set up your automatic payments and transfer all of your money to your new loan. You will close on your old loan when you pay it off in full.
Refinance Today and Save Money!
The refinancing process is straightforward and happens in four steps: shopping around for a loan, getting pre-approved by a lender, signing and agreeing on the final loan, and setting up payments.
One of the best ways to save money on a home loan is to refinance your current mortgage with an experienced lender. Many homeowners find that they can reduce their interest rate and monthly payment and pay off their home loans faster.
If you want to learn more about the refinancing process or how to lower your interest rates, reach out to a trusted mortgage professional. You can also learn more about the different types of refinancing, such as rate-and-term, cash-out, and debt consolidation.
With your new money and rate in hand, you can start making plans for how to best use your extra cash.